Net Income

The steps in the accounting cycle are the following

Step 1 - Inception of business transactions

Step 2 - Recording of transaction in appropriate day book /journal

Step 3 - Information is transferred to appropriate ledgers

Step 4 - Preparation of the trial balance

Step 5 - Recording of year-end adjustments in journal

Step 6 - Transfer of year-end adjustments to appropriate ledgers

Step 7 - Preparation of the adjusted trial balance

Step 8 - Post journalize closing entries

Step 9 - Post closing entries to appropriate ledgers

Step 10 - Preparation of Post-closing trial balance

Step 11 - Preparation

of financial statements

The eleven steps in the accounting cycle noted above will now be explained through examples as follows

Step 1 - Every organization incurs business transactions from its operations , which eventually lead to the accounting cycle . For example the selling of air tickets by an airline company , like Southwest Airlines , leads to a business transaction

Step 2 - Once incepted the business transaction is reflected in the appropriate day book or journal as applicable . For instance , if a ticket is sold for cash by Southwest Airlines , the selling of ticket is recorded in the Sales Day Book , while the receipt of cash is passed in the Cash Book

Step 3- After being reflected in the books of prime entry the transaction is then passed in the appropriate ledgers . If we for example take a business transaction comprising payment of wages by banker automated credit transfer , this transaction will be entered in the general ledger

Step 4 - Once all business transactions are recorded and the balances are computed , they are listed in a statement commonly known as trial balance . For example the remaining balance in the bank account of Southwest Airlines of 1 ,605 million reported on 30 June 2007 is listed on the debit side of the trial balance . The trial balance is prepared before the financial statements in to aid the accountant in the preparation of such final accounts

Step 5 - At the end of year there are certain transactions recorded by the accountant which are performed in to abide with accounting concepts . Such transactions also known as year-end transactions are normally passed at the end of the year . For example at the end of June 2007 a provision for depreciation on tangible fixed assets of 137 million was passed on the books of Southwest Airlines

Step 6 - Once recorded in the book of original entry (journal , they are eventually transferred to the appropriate ledger account as in step 3 For instance , the provision for depreciation is passed on the general ledger

Step 7 - After the preparation and recording of all year-end transactions , balances are again computed in to prepare an adjusted trial balance . This is the same as the one prepared in step 4 with the exception that the year-end adjustments are reflected in such balances . For example , the accumulated depreciation portrayed in the Balance Sheet of Southwest Airlines as at 30 June 2007 of 4 ,007 million would appear in the trial balance and would...